In Mahmud, the Court of Appeal (Second Appellate District, Division Four) refused to enforce an arbitration clause with a class action waiver. In so holding, the Court adopted the reasoning of the Second Circuit in Fensterstock v. Education Finance Partners, 611 F.3d 124 (2d Cir. 2010) (discussed in this blog post):

The issue addressed in Stolt-Nielsen -- whether parties to an arbitration agreement may be compelled to arbitrate a dispute on a classwide basis when the agreement is silent -- is not at issue here. The trial court did not order the parties to arbitrate on a classwide basis. Instead, the court found the arbitration agreement’s class action waiver unenforceable, denied Ralphs’ petition to compel without prejudice, and permitted the action to proceed [in court], at least until the class issue is resolved. The trial court’s actions were appropriate under Gentry, and were not inconsistent with Stolt-Nielsen.

Our conclusion is supported by the Second Circuit’s recent decision in Fensterstock v. Education Finance Partners (2d Cir. 2010) 611 F.3d 124. There, a borrower claimed that the lender had misapplied some of the borrower’s monthly payments, resulting in an overcharge for interest. Applying California law, the district court found that a promissory note provision providing for arbitration of disputes over the loan on an individual basis only was unconscionable under Discover Bank, supra, 36 Cal.4th 148. The circuit court affirmed the unconscionability finding, specifically stating that California law as construed by the Supreme Court in Discover Bank was not preempted because it “‘place[s] arbitration agreements with class action waivers on the exact same footing as contracts that bar class action litigation outside the context of arbitration.’” (Fensterstock v. Education Finance Partners, supra, 611 F.3d at p. 134.) Accordingly, the circuit court upheld the district court order declining to stay the action and compel arbitration.